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Financial Planning Tip April 2023

Deposit insurance is a horribly dull topic -- until it isn't. In the wake of the collapse of several U.S. banks, we are reiterating our advice on deposit insurance that we sent to clients in August of 2022. As we said earlier, the topic can be confusing, and a real crisis is rare enough that it always comes as a surprise. So what do you need to know to ensure your assets are protected?

Banks deposits are covered by the FDIC. Deposits won't vanish unless the U.S. Government collapses. However, not all “banks” are insured. There's no explicit, uniform law preventing non-bank businesses from calling themselves a bank. If you're not absolutely certain that you're making a deposit at a bank, look up the institution at FDIC.GOV. Be skeptical of intermediaries. The now-bankrupt crypto platform Voyager claimed, "Your cash is held by our banking partner, Metropolitan Commercial Bank, which is a member of the FDIC." However, most Voyager customers participated in non-cash deposit programs, and it's unclear whether any customer assets were ever deposited at an actual bank. Unless your deposit takes place directly at a bank holding a valid FDIC certificate, the guarantee is worthless.

In the case of Silicon Valley Bank and Signature Bank, both were real banks with FDIC insurance. Not only did the government guarantee the covered deposits, it guaranteed all deposits at these banks. This has happened frequently in the past, but not always. Technically, FDIC insurance has limits.

FDIC deposit coverage is $250,000 per depositor, per bank, per deposit category. That means you can go to 10 different banks and enjoy $2.5 million worth of coverage. It also means a bank can operate under 10 different charters and offer $2.5 million of coverage. It means joint account holders -- a different deposit category -- are both insured to $250,000 for a total of $500,000 plus up to $250,000 held in a single account holder's name. There are a lot of ways to extend coverage far beyond $250,000, and many banks offer helpful tutorials on how to properly title accounts to achieve this outcome.

Some non-bank institutions are covered by some form of deposit insurance. Credit unions are covered by the NCUA. Rules are generally the same as the FDIC. Investments held in brokerage accounts are insured by the SIPC. Our client accounts with Bank of New York Mellon (Pershing) are covered by SIPC and also by additional insurance up to $1 billion per client. This covers situations where a broker goes bankrupt and securities have disappeared. The SIPC doesn't cover the decline in value of investments.

Though defaults are rare, money market mutual funds are not insured. Practically speaking, the government stepped in to guarantee all money-market funds in 2008, and it's generally extended coverage beyond $250,000 in the event of bank failures. But this protection isn't guaranteed. If you are seeking safety for your cash, be aware of FDIC limits and look for an institution with FDIC backing.


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